Central banks hold paper currencies and gold in reserve. As the central banks diversify their monetary reserves—away from the paper currencies that they've accumulated and into gold—the price of gold typically rises. Many of the world's nations have reserves that are composed primarily of gold. Bloomberg reported that global central banks have been buying the most gold since the U.S. abandoned the gold standard in 1971, with 2019 figures dipping just modestly from 2018's 50-year record.2 Turkey was the largest buyer of gold in 2019, followed by Russia, Poland, and China, according to the World Gold Council.

The price of gold is generally inversely related to the value of the United States dollar because the metal is dollar-denominated. All else being equal, a stronger U.S. dollar tends to keep the price of gold lower and more controlled, while a weaker U.S. dollar is likely to drive the price of gold higher through increasing demand (because more gold can be purchased when the dollar is weaker). As a result, gold is often seen as a hedge against inflation. Inflation is when prices rise, and by the same token prices rise as the value of the dollar falls. As inflation ratchets up, so too does the price of gold.

In 2019, jewelry accounted for approximately half of the gold demand, which totaled more than 4,400 tonnes, according to the World Gold Council. India, China, and the United States are large consumers of gold for jewelry in terms of volume. Another 7.5% of demand is attributed to technology and industrial uses for gold, where it is used in the manufacturing of medical devices like stents and precision electronics like GPS units. Therefore, gold prices can be affected by the basic theory of supply and demand; as demand for consumer goods such as jewelry and electronics increases, the cost of gold can rise.

During times of economic uncertainty, as seen during times of economic recession, more people turn to investing in gold because of its enduring value. Gold is often considered a "safe haven" for investors during turbulent times. When the expected or actual returns on bonds, equities, and real estate fall, the interest in gold investing can increase, driving up its price. Gold can be used as a hedge to protect against economic events like currency devaluation or inflation. In addition, gold is viewed as providing protection during periods of political instability as well.

Gold also sees demand from exchange traded funds that hold the metal and issue shares that investors can buy and sell. SPDR Gold Trust (GLD) is the largest and held over 1,078 tonnes of gold in March 2021. In all, gold purchases from various investment vehicles in 2019 were 1,271.7 tonnes, according to the World Gold Council, representing over 29% of the total demand for gold.

Major players in worldwide gold mining include China, South Africa, the United States, Australia, Russia, and Peru. The "easy gold" has already been mined; miners now have to dig deeper to access quality gold reserves. The fact that gold is more challenging to access raises additional problems: miners are exposed to additional hazards, and the environmental impact is heightened. In short, it costs more to get less gold. These add to the costs of gold mine production, sometimes resulting in higher gold prices.

Risk Warning: The above content is for reference only, and does not represent JRFX’s position. JRFX does not assume any form of loss caused by any trading carried out in accordance with this article. Please consult your financial planner for your investment portfolios and manage your own risk.

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